The writing may well have been on the wall with respect to the Australian Prudential Regulation Authority’s (APRA’s) decision to pursue legal action against IOOF, if IOOF had chosen to familiarise itself with documentation referenced during the final days of the Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry.
That documentation, titled by the Royal Commission as “Draft Enforcement Strategy” openly canvassed APRA toughening up its enforcement approach including pursuing litigation even though the regulator acknowledged the danger that it might actually lose any court action.
Read in association with another document intended to assist APRA’s chairman, Wayne Byers, the “Draft Enforcement Strategy" document made clear the regulator was concerned about how it was being perceived and whether it could have done more; that its focus on protecting beneficiaries and ensuring system stability may have come at a cost.
“The prioritisation in APRA’s enforcement strategy of the elements of protecting beneficiaries and financial system stability over the element of deterrence is appropriate for a prudential regulator, and consistent with its statutory mission. The appropriate allocation of resources should necessarily support the primary functions of the agency,” the APRA paper said.
But it then went on to state: “However, while there is a genuine conflict that may be found between the elements of protecting beneficiaries and system stability vs deterrence, it may be appropriate to consider whether over time APRA has overly deprioritised enforcement action and the public policy benefits that can come with successful general deterrence”.
“This may be a result of an increasingly cautious attitude in erring on the side of stability, or a view that enforcement action should only be taken when the financial promises made to beneficiaries have not been kept,” it said. “One effect of overly deprioritising enforcement action is that we may not meet the expectations of a public agency charged with enforcing laws.”
“Another issue to consider would be the industry differences. What is a loss to beneficiaries in superannuation is not as black and white as it is in banking or insurance. Financial promises to beneficiaries in banking and insurance is usually quantifiable to a precise amount. Losses in superannuation are more nebulous due to the wide variations in the industry around returns and fees. “
However the paper then questioned the efficacy of litigation, highlighting the inherent risks.
“Prospective litigation presents an issue in that it will always have an inherent uncertainty that may be uncomfortable to supervisors. There may be a discrepancy between the certainty of information that can be obtained and relied upon in prudential supervision, such as financial statements, and the uncertainty of outcomes once a litigation process has begun.”
“This level of uncertainty may weigh against decisions to commence enforcement action because of a custom of making decisions based on a higher degree of certainty than litigation options can offer,” it said.
“It is important to note however, that despite the difficulties present for a prudential regulator in taking deterrence action, it would jeopardise APRA’s ability to achieve its statutory mission without the ability to take enforcement action,” the regulator’s paper said. “APRA can point to numerous successful outcomes that were backed by the powers it could draw upon, even if it was ultimately determined that the use of those powers was unnecessary because a desirable prudential outcome had been achieved without using them.”